GT Alert

Department of Labor Issues New COBRA Notice Regulation

On May 28, 2003, almost 17 years after COBRA became law, the Department
of Labor (DOL) has finally issued a proposed regulation that provides current
guidance regarding the timing and content of COBRA notices and the establishment
of standards for administration of the COBRA notice process. The proposed
regulation includes models of an initial COBRA notice (which the DOL calls
the General Notice of COBRA Continuation Coverage Rights) and a COBRA qualifying
event notice (which the DOL calls the COBRA Continuation Coverage Election
Notice), both of which, if adapted and used by employers, would constitute
a "safe harbor" for compliance. The new proposed regulation is also very
helpful in the way it clarifies time frames and procedures for providing
COBRA notices.

"The Department of Labor has
issued a proposed regulation that provides current guidance regarding
the timing and content of COBRA notices."

This regulation will become final and effective for plan years starting
on or after January 1, 2004. The DOL has asked for written comments by July
28, 2003, and it is widely anticipated that there will be some changes to
some details of the proposed regulation and model notices before it becomes
final and effective. However, it is not anticipated that any of the changes
will modify the major substantive provisions of the proposed regulation.

This Alert provides detailed explanations of the most important provisions
of the new proposed regulation, highlighting all new requirements. Generally,
compliance with its provisions should not be burdensome to employers, even
with respect to the new requirements.

The New Notice Requirements

The new proposed regulation makes no substantive changes with respect
to the four notices that have been required since the inception of COBRA,
but it does clarify the time frames for providing those notices and specifies
exactly what information they should contain. They are:

The initial COBRA notice

Notices that qualified beneficiaries must provide to plan administrators

The COBRA qualifying event notice

The form to be used by for qualified beneficiaries to elect COBRA
continuation coverage

The new proposed regulation calls for two new COBRA notices that have
never been mentioned in either the COBRA statute or in previous regulations.
They are:

A "notice of unavailability of COBRA coverage"

A "notice of termination of COBRA coverage"

The requirements of the new proposed regulation regarding each of these
notices are as follows:

Time Limits

The new proposed regulation makes it clear that an employer is in compliance
with COBRA if it furnishes the initial COBRA notice to the employee and
spouse within 90 days after the employee becomes covered by the
plan.

What’s New: If an employee elects single (employee-only) coverage
and subsequently adds a spouse to the coverage (making it family coverage),
the plan must provide the spouse with a new initial COBRA notice within
90 days after the spouse becomes covered by the plan.

In addition, if the employee, spouse or any dependent child has any COBRA
qualifying event within that 90-day period, the initial COBRA notice must
be provided in a shorter time period so that the employee, spouse and dependent
child will have adequate information to elect COBRA continuation coverage
on a timely basis.

Procedures

The new proposed regulation does not make any significant change in the
current regulatory requirements regarding how the initial COBRA notice is
to be delivered. Generally, employers can use any method that works as long
as delivery is actually made to the employee and covered spouse. Hand delivery
of a COBRA notice to the employee with instructions to "show it to your
spouse" has never been regarded as compliance with the COBRA requirements,
and this is specifically confirmed by the new proposed regulation.

The most efficient and cost-effective method is to send it by first-class
mail addressed to the employee and (where applicable) spouse. Current COBRA
regulations also require that the substance of the initial COBRA notice
also appear in the plan’s Summary Plan Description (SPD).

What’s New: The new proposed regulation permits the initial COBRA
Notice to be included in the SPD, and considers mailing of that entire SPD
to the employee and spouse to constitute compliance with the COBRA delivery
requirements. An employer can also comply by delivering the SPD to the employee
by hand and mailing a separate initial COBRA notice to the spouse. Neither
approach is very practical. Mailing SPDs can be costly, and it costs nothing
to simply mail an initial COBRA notice to "Mr. and Mrs. Employee and Family."

Contents

The new proposed regulation does not make any change in the required
contents of the initial COBRA notice. However, it does provide a Model General
Notice of COBRA Continuation Coverage Rights which, if adapted and used
by an employer "will be deemed to satisfy the notice content" of the regulation.
Use of this model notice is not required. The DOL "anticipates that
a variety of other notices could satisfy the requirements of the regulations."

Comments

Unless an employer’s current initial COBRA notice is clearly deficient
in its content, immediate adoption of the model notice is not recommended
because it is anticipated that the text of the model notice will be
modified, at least to some extent, in the final regulations later this year.

If an initial COBRA notice is not in compliance either with the regulations
that currently exist or with the new proposed regulation when it becomes
effective, the employer, not its COBRA administrator or advisor,
will be liable for penalties. Employers should ask their COBRA administrators
to agree to hold them harmless for COBRA penalties if it turns out that
their initial COBRA notices do not comply with the regulations, or at the
very least, a written representation that the initial COBRA notice it provides
is in compliance.

We anticipate that everyone will end up using the model notice in the
final regulation because that will be a safe harbor for everyone.

Notices That Qualified Beneficiaries Must Provide to Plan Administrators

Contents

The current regulations require plan participants to provide as many
as four notices to the plan related to COBRA continuation coverage, and
these requirements are unchanged. They are:

Qualifying Event Notice: A notice of the occurrence of qualifying
events that only they could know about, including:

Divorce or legal separation

Covered dependent children ceasing to qualify as eligible dependents

Notice of a Second Qualifying Event: Usually a notice of a
similar qualifying event that occurs during an 18-month period of COBRA
continuation coverage

Social Security Disability Notice: A notice that the Social
Security Administration has determined that a plan participant is disabled
and entitled to Social Security disability income benefits. This extends
an 18-month period of coverage to up to 29 months

Notice of Termination of Disability: A notice that the Social
Security Administration has determined that a plan participant is no longer
disabled and entitled to Social Security disability income benefits. This
allows the plan to terminate extended COBRA coverage.

Time Limits

The COBRA statute requires the first three of these notices to be given
within 60 days of the qualifying event or the date the qualified
beneficiary receives a determination of disability from the Social Security
Administration. However, the notice of Social Security disability must also
be given to the plan no later than the end of the 18-month period of COBRA
continuation coverage. If the notices are not provided within those time
limits, the plan participant will not be entitled to elect COBRA continuation
coverage or to extend the period of COBRA continuation coverage. Obviously,
the new proposed regulation cannot change those time limits. Plans are permitted
to allow longer periods of time than 60 days, but they rarely (if ever)
do so.

There does not appear to be any required time limit for providing a notice
of termination of disability, but COBRA permits the plan to terminate COBRA
continuation coverage during the 11-month extension of the 18-month period
as of the first of the month that begins more than 30 days after the date
of that determination.

What’s New: The new proposed regulation requires the plan to
"establish reasonable procedures for the furnishing of [these] notices."
Those procedures will be deemed reasonable if they are:

Described in the plan’s SPD

Specify the means by which qualified beneficiaries must give those
notices, such as the use of specific forms if they are easily available
without cost

Specify the required content of that notice

Anticipating that some (perhaps most) employers won’t create such procedures,
the regulation provides that, in the absence of such procedures, a written
or oral communication will be deemed to provide the required notice if it
identifies a specific qualifying event is made in a manner reasonably calculated
to bring the information to the attention of the employer’s unit that customarily
handles employee benefits matters, to an officer of the employer, or to
the same entity or officer of an insurer that administers benefits for the
plan.

The COBRA Qualifying Event Notice

Time Limits

COBRA requires an employer to notify the plan administrator that a qualifying
event occurred within 30 days after it occurs (or after the plan participant
notifies an employer that a qualifying event occurred). The plan administrator
is then required to provide a COBRA qualifying event notice within 14 days
after it receives that notice from the employer. The new proposed regulation
now makes it clear that if the employer is also designated as the plan administrator,
it has 44 days from the date of the qualifying event to provide the
COBRA qualifying event notice. Until now it was not clear if COBRA required
an employer who is also the plan administrator to provide the required notice
within 14 days or 44 days. Obviously, regardless of how long a plan has
to provide a COBRA qualifying event notice, it should do so as soon as possible,
because the sooner it is given, the sooner the COBRA election period will
expire.

Procedures

The new proposed regulation does not make any significant change in the
current regulatory requirements regarding how the COBRA qualifying event
notice is to be delivered. Generally, the same procedures required for the
initial COBRA notice apply to the COBRA qualifying event notice.

Content

As a practical matter, the new proposed regulation does not make any
major change in the current regulatory requirements regarding what information
must be included in the COBRA qualifying event notice, but it does specify
15 elements of information:

The identity of the plan and the party responsible for administration
of COBRA.

Identification of the qualifying event.

The identity of each qualified beneficiary who can elect COBRA continuation
coverage, and the date coverage under the plan terminates if no election
is made.

A statement that each qualified beneficiary has an independent right
to elect COBRA continuation coverage, and that an employee’s spouse or
a parent or legal guardian may elect COBRA continuation for covered minor
children.

An explanation of the procedure to elect COBRA continuation coverage,
the time period during which the election can be made, and the date by
which the election must be made.

An explanation of the consequences of failing to elect COBRA continuation
coverage, including the impact on rights provided under HIPAA if COBRA
continuation coverage is not elected, and procedures for revoking a waiver
of COBRA continuation coverage before the 60-day election period expires.

A description of the COBRA continuation coverage that will be provided
(or a cross reference to the SPD) and the date it will start (which is
immediately after the plan’s coverage would otherwise end).

An explanation of the applicable maximum 18-month or 36-month period,
the termination date, and the events that can cause the coverage to end
before the end of the maximum period.

An explanation of the circumstances by which the 18-month maximum
period can be extended due to either a secondary qualifying event or a
determination of entitlement to Social Security disability income benefits.

A description of the responsibility of qualified beneficiaries to
provide notice of a second qualifying event or entitlement to Social Security
disability income benefits that permits extension of the 18-month COBRA
period, including procedures and time limits for providing those notices.

The amount that must be paid for the COBRA continuation coverage.

The due dates for those payments, including the right to pay monthly,
the applicable grace periods, the address to which payment is to be sent,
and the consequences of delayed payment or non-payment of the amounts
due.

A description of any alternative or additional continuation coverage
(such as employer-paid periods of continuation coverage, retiree coverage,
or conversion), and an explanation of how election of other coverage would
affect a qualified beneficiary’s right to COBRA continuation or conversion
coverage.

An explanation of the importance to keep the COBRA administrator informed
of the current address of COBRA participants.

A statement that "the notice does not fully describe continuation
coverage or other rights under the plan, and that more complete information
regarding such rights is available in the plan’s summary plan description
or from the plan administrator."

Comments

Unless an employer’s current COBRA qualifying event notice is clearly
deficient in its content, immediate adoption of the model notice is not
recommended because it is anticipated that the text of the model notice
will be modified, at least to some extent, in the final regulations later
this year.

Once again, employers who use reputable COBRA administrators can rely
on them to develop fully compliant COBRA qualifying event notices before
the final notice regulations become effective. Most will probably use the
model notice because it will be a safe harbor.

Form for Qualified Beneficiaries to Elect COBRA Continuation Coverage

Time Limits

COBRA has always provided that qualified beneficiaries have 60 days from
the date they receive a COBRA qualifying event notice to make an election
of COBRA continuation coverage. Of course, this remains unchanged.

Content

Neither the law nor the current regulations indicate what information
is required to be provided. That’s probably because the information that
is needed for a plan to process an election for COBRA continuation coverage
may be specific to the plan itself. Obviously, the notice must identify
the individuals for whom COBRA continuation coverage is being elected, the
specific coverage or coverages that are being elected, and the name and
address of the individual who is making the election so that notices can
be sent to that person.

Comments

Well-designed COBRA qualifying event notices incorporate or include an
appropriate election form. The model COBRA Continuation Coverage Election
Notice in the proposed regulation begins with a sample election form that
calls for the obviously necessary information that all plans will require.
The election form included at the end of the COBRA qualifying event notice
in the appendix is somewhat identical but is laid out in a slightly different
manner. Clearly, each plan will have to use an election form that is adapted
to its specific administrative needs. To the extent that additional information
is required, it should be requested. Blind use of the sample election form
in the proposed regulation may be inadequate for all plans.

Notice of Unavailability of COBRA Coverage

What’s New: This new notice is required when an employer receives
one of the following notices that qualified beneficiaries must provide to
plan administrators:

Qualifying Event Notice: A notice of the occurrence of qualifying
events that only they could know about, including:

Divorce or legal separation

Covered dependent children ceasing to qualify as eligible dependents

Notice of a Second Qualifying Event: Usually a notice of a
similar qualifying event that occurs during an 18-month period of COBRA
continuation coverage

Social Security Disability Notice: A notice that the Social
Security Administration has determined that a plan participant is disabled
and entitled to Social Security disability income benefits. This extends
an 18-month period of coverage to up to 29 months

An employer who receives such a notice and determines that the individual
is not entitled to COBRA continuation coverage must provide the qualified
beneficiary with an explanation as to why that person is not entitled to
elect COBRA continuation coverage.

Time Frames and Procedures: The new proposed regulation requires
employers to provide such a notice within the same time frame required for
a COBRA qualifying event notice – that is, 14 days after receipt of the
notice from the qualified beneficiary if the notice is sent directly to
the plan administrator, or 44 days if the notice is sent to an employer
who is also the designated plan administrator. The same procedures applicable
to all other notices apply to this notice. That is, the notice can be sent
to all family members by first class mail addressed to "Mr. and Mrs. Employee
and Family" (or to any applicable modified designation of the covered individuals).

Comment: The only apparent valid reason for an employer to deny
COBRA continuation coverage is that the notice was not provided within the
time frames required by the law. However, once this regulation becomes final,
regardless of what the reason for a denial of COBRA continuation coverage
may be, the employer will have to provide such an explanation.

Although this is a new requirement, it does not appear to impose any
significant burden on employers. It would seem that common acceptable business
practice would be to provide such a notice in writing within those time
frames even in the absence of a regulatory requirement.

Notice of Termination of COBRA Coverage

What’s New: This new notice must be provided whenever a COBRA
administrator determines that COBRA continuation coverage terminates prior
to the applicable maximum period (that is, 18, 29 or 36 months). The notice
must state:

Why the COBRA continuation coverage terminated

The date the termination became effective

Any right the qualified beneficiary might have under the plan or applicable
law to elect alternative group or individual coverage, such as a conversion
right

Time Frames and Procedures: The new proposed regulation requires
employers to provide such a notice "as soon as practicable following the
administrator’s determination that continuation coverage shall terminate."
The same procedures applicable to all other notices apply. That is, the
notice can be sent to all family members by first class mail addressed to
"Mr. and Mrs. Employee and Family" (or to any applicable modified designation
of the covered individuals).

Comments: Once again, this is a new requirement that does not
appear to impose any significant burden on employers.

COBRA continuation coverage can be cut off prior to the maximum applicable
period only for the following reasons:

The employer no longer provides group health coverage to any of its
employees

The amount due for the COBRA continuation coverage was not paid on
time

The covered person became entitled to Medicare

The covered person became covered under another group health plan
that does not contain any legally applicable exclusion or limitation with
respect to that person’s preexisting condition

If the plan so provides, coverage was terminated for cause under the
terms of the plan that apply to similarly situated non-COBRA beneficiaries
(for example, submission of a fraudulent claim)

It would also seem that common acceptable business practice would be
to provide such a notice in writing within those time frames even in the
absence of a regulatory requirement.

Conclusions

It does not appear that this new proposed regulation is burdensome, despite
some outcries to the contrary. Although some minor modifications may be
in order, the new regulation appears to be reasonable and consistent with
current law and regulations, and is not difficult to implement.

The proposed regulation makes it quite clear that employers do not have
to use the model notices as long as the notices they do use contain all
the required information specified in the regulation. Those model notices
use the text of the COBRA statute, which is not necessarily understandable
to the average plan participant. However, most employers will replace their
existing notices with whatever model notices end up in the final regulations
because they will constitute safe harbors. To avoid application of the rule
that no good deed will go unpunished, we believe that employers will be
reluctant to try to "improve" the text of those model notices to enhance
readability. This will probably be one of those rare instances where most
employers will conclude that Uncle Sam knows best.

There is some question about how important it is for a plan to establish
"reasonable procedures" for plan participants to provide information about
qualifying events related to divorce and dependent children and determination
of disability. The absence of such procedures has not been a problem except
when employers simply failed to provide an initial COBRA notice. Some COBRA
experts believe it is imperative to develop such procedures, but if things
haven’t gone wrong in the absence of such procedures in the past, it may
not be as important as they think.

Immediate adoption of all notices and procedures set forth in the proposed
regulation is permitted, but is generally not recommended, except, of course,
where current procedures and notices are clearly not in compliance with
COBRA. Some changes are expected before the regulations and the model notices
become final. The very good news is that once they do become final, everyone
will know exactly how to deal with COBRA notices and will have the comfort
of using notices that constitute safe harbors.

This GT ALERT is issued for general purposes only and is not intended
to be construed or used as legal advice. Greenberg Traurig attorneys provide
practical, result-oriented strategies and solutions tailored to meet our
clients’ individual legal needs. The Firm’s responsive approach to client
service often cuts across legal subject matter, applying the right experience
and resources to provide cost-effective solutions.